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Resilient show in challenging scenario….

About the stock: Through its differentiated product offerings and business model, Faze Three (FTL) stands apart from other home textile players. It manufactures and exports home textile products in multiple categories (apart from bed sheets, towels that currently other listed players specialise in) with bathmats and rugs being the dominant category (~80% of revenues).

* US, UK/Europe regions contribute ~90% of its overall revenues. Top 15 customers comprise very large retail chains such as Walmart & Target

* Vertically integrated business model with in-house capability of design & development. FTL’s order book is mostly backed by customer commitment

Q2FY23 Result: Maintained healthy double digit margins amid volatile RM scenario. Operated at utilisation level of 85%+ (vs. other home textile players: 50-60%)

* On a YoY basis, sales grew 17% YoY (down 7% QoQ) to | 137.0 crore

* Despite volatility in RM prices (cotton/polyester), the company maintained EBITDA margins at 17.4% (Q1FY23: 16%, Q2FY22: 17.8%). Absolute EBITDA grew 14% YoY (2% QoQ) to | 24 crore

* PAT grew 6% YoY to | 14.4 crore (down 2% QoQ)

What should investors do? Over the past five years, the impact of FTL’s improved financial performance has been visible in the upward momentum in stock price, which has grown at ~25% CAGR over the period. Near term challenges (slowdown in key export markets, inventory de-stocking by retailers) may persist but we believe there is enough headroom for sustainable long term growth.

* We maintain HOLD rating on the stock with a revised target price

Target Price and Valuation: We value Faze Three at | 350 i.e. 12x FY24E EPS.

Key triggers for future price performance:

* Decent order book visibility for H2FY23 could sustain the current quarterly run rate. New products, development pipeline, orders are showing encouraging signs and improving sentiments vs. H1FY23

* Embarked on brownfield capex and outlined capex of | 80 crore across product lines, categories like rugs, bathmats and top of the bed segments

* The aforesaid capex is expected to generate incremental revenue worth ~| 800-1000 crore (asset turnover: 8-10x). Value accretive capital deployment to enhance RoCE to 25%+ in the next three to four years

* Visible shift by large retailers on sourcing to India from China across the company’s product categories to create sustained demand

* We build revenue, earnings CAGR of 14%, 17%, respectively, in FY22-24E

Alternate Stock Idea: Besides Faze Three, we also like Gokaldas Exports (GEL).

* GEL is one of India’s leading apparel exporter with an annual capacity of 36 million pieces, which focuses on manufacturing complex garments

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